pjbogart wrote:... but it was doing so at the expense of Social Security collections. I would say that if people are concerned about economic slowdown related to the expiration of the payroll tax cut, they should lobby for a 2% reduction in federal taxes unrelated to Social Security.

There is plenty of fat to be cut from the federal budget without weakening our social safety nets.

As mentioned earlier, the "payroll tax holiday" didn't have any direct effect on Social Security's finances, because the reductions were compensated for by transfers from general-fund revenues. In essence, it was exactly equivalent to an income tax cut, except that because of the regressive nature of payroll taxes, the "holiday" was more progressive in its impact than an income tax cut would have been.

I'm not going to get into the metaphysics of whether the scheduled expiration of a temporary tax cut counts as a tax increase. I think both Jason and those who disagree with him have valid points.

Jason's right that the end of the payroll tax holiday represents a significant dose of anti-stimulus. Because payroll taxes are fundamentally regressive, cutting them (temporarily) increased the overall progressivity of the tax code. Since the lowest-income earners are most likely to turn around and spend their tax savings, cutting payroll taxes is a rapid and effective form of stimulus. Now we'll see that play out in reverse.

I don't know why there was so little attention to the expiration of the payroll tax holiday over the past month or so, compared to the amount of attention given to the brackets and rates for income taxes.

On the other hand, I don't know why Jason is expecting inflation, given his pessimism about people cutting back on spending following this tax increase (or un-decrease, or whatever you want to call it). Doesn't this scenario make inflation even less likely?

If I ran the world, we'd have some more or less automated counter-cyclical policies that would cut taxes and increase spending as long as unemployment is high and inflation is low, then raise taxes and cut spending once the economy heats up and those numbers flip.

In the medium to long term, though, we're all going to have to pay more taxes, and the richer we are, the more we're going to need to pay.

The past three years have been an anomaly, with taxes artificially low at 15.1% to 15.4% of GDP each year. Those are the lowest three years in more than half a century. (When Reagan left office, in 1989, taxes were 18.4% of GDP).

You can't run the country that way forever. Over the next decade or two, either spending has to be radically cut, or taxes need to go back up by a lot.

Jason's reaction is understandable, particularly given that we're still in an economic downturn and that it's hard for the middle class to stomach seeing their taxes raised while the gap between middle-class and rich keeps growing.

But will it be any easier for the middle class to accept seeing our taxes increase even if the economy is doing better and some hypothetical progressive victory has already raised taxes on the rich? Perhaps the past decade of low taxes has had a toxic effect of getting people psychologically used to not having to pay for the benefits of spending.

kurt_w wrote:In the medium to long term, though, we're all going to have to pay more taxes, and the richer we are, the more we're going to need to pay.....Jason's reaction is understandable, particularly given that we're still in an economic downturn and that it's hard for the middle class to stomach seeing their taxes raised while the gap between middle-class and rich keeps growing.

I think we have to stop talking about "the middle-class" and "the rich" as if that really describes the distribution of incomes. There is a class divide within what we call "the middle class."

The comfortably middle class have maximum political clout. Policies affect the interests of the lower half of the middle class in completely different ways than households in the $100K to $3M income range. The payroll tax, for instance, is largely irrelevant to the comfortably middle class.

My brother, who is a Mitt Romney sort of guy who manages small companies for investors, is a budget whiz and a budding rich guy. He doesn't live in a fancy house and drive fancy cars, he is "middle class." He *carefully* scrutinizes government policy, and is all over this fiscal cliff deal. He says he will be paying unconscionably low taxes for years to come, which he sees as a disaster for the country.

MOST GOVERMENT LARGESSE FLOWS TO THE COMFORTABLE MIDDLE CLASS, not to the poor, not to people with modest income, and not the very rich. The mortgage interest deduction benefits mostly people with household incomes over $100K. The people with cadillac health care plans that are being subsidized by the Feds mostly have higher paying jobs.

The estate tax exemption was raised to $5M in the deal. This is a gift to households in that $100K to $3M range. Again, it's the comfortable middle class who are off the hook in dealing with the deficit.

The money to sensibly address the deficit is in the middle class, not the very wealthy. I see no evidence that the politicians can take actions that hurt the middle class with good jobs. Obama's politically popular "tax the rich" strategy generates only modest revenue.

The author of that study makes (to my mind) a dubious inference. Just because decision makers think like the 90 percentile on a broad range of issues doesn't mean they were bribed.

But even if you accept the author's conclusion, it essentially supports my statement! I'm saying that the upper middle class drives policy. The 90 percentile is in the upper middle class. That drive policy both with money and reliable voting.

I'm not quite sure what to make of that study, it is confusing and sweeping. Perhaps there is some wisdom in there.

It doesn't really matter if Congress responds to the wealthy (and, yes, 90th percentile is wealthy, and there's no reason to assume they don't respond even more strongly to the desires of the 95th or 97th or 99th percentile) because they were "bribed" or because that's where they come from. That's a red herring.

The point is, compared to the very wealthy, the middle class actually have relatively little political clout. Compare the left panel of that graph to the right panel. The slope of the line for the 50th percentile is barely steeper than the 10th percentile. As far as Congress is concerned, the interests of the poor and of the middle class are pretty much irrelevant, unless they also happen to coincide with the interests of the rich.

kurt_w wrote:I don't know why there was so little attention to the expiration of the payroll tax holiday over the past month or so, compared to the amount of attention given to the brackets and rates for income taxes.

Because the the former is only significant for the vast majority of people who make under $250K/year. The punditry class (or rather, the people they are beholden to), who are blessed with the authority to call attention to such things, are more affected by the latter.

kurt_w wrote: The point is, compared to the very wealthy, the middle class actually have relatively little political clout.

I agree that the 50 percentile has little influence. The 50 percentile is what I expect is the very bottom of the middle class. With half the country not paying income tax, maybe the cutoff is even higher these days.

In my perception, I the comfortable middle class occupies the 75 to 95 percentile range. I do not consider households with income under say, $2M to be wealthy.